After BSkyB, what’s next for News Corp?

News Corp investors appear to be breathing a sigh of relief now that the media conglomerate has withdrawn its troubled $US12 billion bid for British Sky Broadcasting. Shares in the company were up more than 6 per cent as of early Wednesday afternoon, to $US16.31.

Perhaps they shouldn’t expect the company’s troubles to cease just yet. After all, the phone hacking scandal that ultimately consumed The News of the World remains the subject of government inquiry. And News Corp’s Rupert Murdoch is still being called to testify before parliament.

So what might News Corp do next?

The media behemoth has already taken steps to prop up its stock price, which has fallen 6.3 per cent over the past month. On Tuesday, the company announced that it would expand a share-buyback program up to $US5 billion.

But analysts and industry observers say that News Corp may still be forced to take more drastic action - like divesting itself of its troubled British newspaper unit, News International. Though the phone hacking and policy bribery scandals had revolved around the now-shuttered The News of the World, recent news developments suggest that the remaining papers, The Sunday Times and The Sun, may be tainted as well.

The former prime minister Gordon Brown has accused The Times and The Sun of using subterfuge to gain medical information about his infant son. Both papers have denied breaking any laws to obtain the information.

Still, that ongoing controversy - and News Corp’s willingness to withdraw the BSkyB bid rather than sweat out the regulatory scrutiny period - suggests that more pain may be in store for News International. That has prompted ongoing speculation about what Mr Murdoch, who loves newspapers more than his shareholders do, may do next with his British paper holdings.

From a Nomura report published Wednesday morning, after news of the BSkyB bid’s withdrawal: “Perhaps this rebuke will force News Corp to reconsider its ownership of UK newspapers. We hope this is a turning point for the company’s strategy and asset allocation as the ownership of highly inconsequential newspaper."

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The author and Mr Murdoch biographer Michael Wolff told Reuters that the lack of love for News Corp’s newspaper holdings extends beyond the company’s shareholders: “There has always been a faction within News Corp that has asked Rupert to get rid of the newspapers including former No. 2 Peter Chernin and Fox News chief Roger Ailes. I imagine Chase Carey is also not keen on papers. This has become an opportunity for that faction."

While some within News Corp were reportedly lukewarm about the BSkyB deal, perhaps favouring expanding in faster-growing markets like China, they could at least find positives in the broadcaster’s consistent cash flow.

By contrast, News International has contributed increasingly less to News Corp’s bottom line. According to the company’s most recent annual report, the British newspapers’ revenue for the fiscal year ended June 30, 2010 fell 2 per cent, thanks to declining circulation.

News Corp is likely to hold onto its other newspaper holdings, including Dow Jones & Company, which publishes The Wall Street Journal, and its Australian assets. But industry observers are increasingly betting on the company spinning off News International, rather than potentially selling off the unit at a firesale price to attract buyers.

Alternatively, analysts at Credit Suisse speculated on Wednesday that News Corp may turn to yet another acquisition to satisfy its well-known deal appetite. The company still has nearly $US11.8 billion in cash and short-term investments as of March 31, a significant amount of dry powder for an acquisition.

Some analysts have suggested that News Corp may try again at a later time to buy the rest of BSkyB, perhaps in a year’s time. The company certainly reiterated that it’s a “committed long-term shareholder" in the satellite broadcaster, suggesting that it won’t sell off its 40 per cent stake anytime soon. But given how toxic and volatile the political wildfire around the hacking scandal remains at this point, it’s a bet that News Corp investors may not want to make.